Tom Douglas on Proposed $15/Hour Minimum Wage Increase

Most of you have heard about the Seattle movement to raise the minimum wage to $15/hour. While we all want to see more money put into the hands of those who are at the bottom of the wage scale, we also feel that there hasn’t been enough public discussion given to issues such as whether benefits are to be considered part of wages and, of special importance to the restaurant industry, whether tips are to be considered part of wages. If the answer to both these questions is no, what are the economic consequences to businesses and in particular to our restaurant business model? This is a complicated issue and one that we think is not well served by slogans. Our company’s own recent back-of-house wage increase initiative has vaulted us to the forefront of this debate. Tom would like to clarify his thoughts on the proposed $15/ hour minimum wage increase as a way of starting a discussion on how this increase, if it is passed by the City Council or voted in on the ballot, will affect all of us and our economic futures. Here is Tom’s letter:

$15 NOW is a catchy easy to understand slogan. Where we stand on it is the question of the day and has been every day for months on end. This is a very important issue and is not going to be swept under the carpet. So let’s explore it from the restaurateurs’ perspective, mine in particular.

I have been at the forefront of this issue, in the media’s eyes, because of our back of the house (BOH) initiative last August.I felt, and continue to feel that the kitchen side of our business is undervalued economically as a profession. While health care has always been a priority at our restaurants, too many of our BOH crew have to choose between their doctor and their rent. Restaurant kitchens are a traditional landing zone for people who have chosen culinary careers, skilled craftsmen and women, gaining valuable experience for future endeavors. The newest immigrants to America often fill positions in the BOH while they learn a new language and acquire new job skills. On average our dish team earns $12 per hour, prep cooks $13 and cook’s $15+. BOH also receives a small tip out from the FOH in the neighborhood of $50-$75 a month. Up to 9 days of Paid Sick and Safe Leave was mandated by City council decree and implemented in 2013 for all staff members.

The front of the house (FOH) crew typically consists of highly trained hospitality veterans. Many have honed their craft over a decade and deliver graciousness and deliciousness every day. Waiters, bussers, hosts and bartenders all receive gratuities as part of their wages. These “tips” are considered wages by the IRS and the State of Washington. We pay the typical payroll taxes on these tips and are responsible for the federal taxes if a tipped staff member doesn’t declare and pay their appropriate tax share. In fact they ARE the wages of our industry. When you include the current minimum wage of $9.32 most FOH staff members make in excess of $20 per hour with a high of $40 to $50 depending on their shift.FOH wage earners also receive the benefit of CPI on menu pricing because tips are based on the menu price. There is always the possibility that a shift might be “called off” for business volume reasons which would equal zero pay.

This does not mean that the tipped employee is getting filthy rich either. I don’t begrudge the FOH its traditional wage structure, but we need to realize that the $15NOW movement was born in the fast food industry model and not tipped dining.

There is much to be gained or lost when the Mayor’s task force and City Council’s task force arrive at their recommendations. Even more important is having leadership with a back bone to decipher the suggestions and fight for what is right.

Let’s look at our current business model.

…We run on average a 5% profit business before taxes and reinvestment.

…We offer full health care benefits to anyone willing to take on the responsibility of management and subsidize at 50% of the medical insurance premiums for anyone else on our team who would like health care, requiring only that they average 25 hours a week worked. We subsidize 75% for those staying with us more than seven years.

… We offer vacation benefits of 1 week after 1 year, 2 weeks after 2 years and 3 weeks after 5 years and 4 weeks after 10 years to every full time staff member who works 40 hours per week and proratedvacation pay to part time staff who work 25+ hours per week annually.

… We offer up to 9 paid sickleave days to every full time staff member and corresponding leave to part time staff.

…We offer 50% off dining in any of our restaurants to staff and a guest.

…We keep a staff emergency fund for those times that a team member requires more cash than what’s on hand.

…We pay for uniforms when they are required.

…We do not charge staff credit card fees on tips.

…We even have free espresso:)

The $15NOW group would like to see a $15 minimum across all job classifications and immediate implementation.

I would like to see the minimum wage increase (who decreed that it has to be $15?) phased in over 5 years for non tipped staff. I would like to see the FOH continue at minimum wage + consumer price index raises each year. There should be implementation across all businesses uniformly regardless of size and structure.

Our numbers suggest that if $15 NOW has its way without any consideration for tip enhanced wages, fine dining restaurant prices would immediately jump 20%. That is a $5 million+ direct price hike annually on our menus and consequently to our customers. That is more than double our bottom line before taxes and reinvestment. In other words there is no way for us to absorb this expense in-house. This also does not reflect price increases we are likely to receive from our farmers, dry goods vendors and beverage distributors. This price increase is hugely inflationary to the restaurant business and is irresponsible when considering business people who have long-term leases and investments based on prior economic models.

Maybe there are too many restaurants and this will be a natural way to cull out the weakest among them. I do have some concern that we would have to shutter some of our, but if that’s what the voters want then so be it. They are the ones who will be asked to foot the bill. This is going to touch everybody soon, so I suggest you do your own math and see where it might affect your life. Can or will your employer still afford health care? Staff meals? Everything you buy from local produce to rent to childcare to your own meals out on the town will be affected. We do know that the City Council and Mayor’s office will still make their wage and enjoy their health and retirement benefits without fail.

I would be lying to say that I’m not concerned with the outcome of this national experiment happening in the Seattle market. It is also not lost on me that our City Council and Mayor’s office have very little small business experience.While they have budgets to live by, they are not playing with their own cash. Parking meter fees, B&O tax dollars, excise “sales” taxes and fees collected from tourist and business travelers and the rest of us are chess pieces to be moved on a board, but the cost of failure is ours, the tax payers. Raises and benefits given to city workers are from our tax pockets.They might get voted out of office for their actions and decrees, but they won’t go bankrupt. It is inherently easier to spend other people’s money than the gut check of investing your last dime into a dream.

I have put our money where our mouth is in trying to offer a more livable wage to our non-tipped staff. Seattle currently has the highest “waiter wage” in the country. We have already had to raise menu prices to cover our BOH wage initiative even though I was determined to absorb its cost within our current bottom line. What is a reasonable profit for us to make? If you think for a second that “Tom Douglas Restaurants” are “too big to fail” you are sadly mistaken.

I am frustrated that the Walmarts and McDonalds of the world have not stepped up to offer more livable wages and health care for their employees and record huge profits all the while. They should be ashamed of their business models.They rely on food banks to feed their crews and hospital emergency rooms to provide their health services all on the backs of responsible employers and citizens. I prefer compassionate capitalism over “highest best use” and ” maximized profits”. These reckless ME ME ME terms inevitably lead to the destruction of the relationship and trust between ownership and staff.

We as a company have worked hard to keep Seattle a viable downtown and a more livable city. My fellow restaurateurs, hoteliers and I have stepped up to every charitable cause and have been compassionate, active neighbors. When business from outside of our city decides whether to pick our town for their convention or business meeting, they look at the economics for their attendees. When tourists pick a destination, it often reflects the “deal” they are able to get.As a board member of Visit Seattle, I know we are one of the most expensive locations in the country already. Thirty to forty percent of our business, depending on the season, relies on travelers’ spending.

When a local has to choose where to dine, they are now faced with a 520 bridge toll, increased parking rates and hours, future tunnel tolls, terrible traffic jams and now a possible 20%+ menu inflation. It’s not hard to imagine them choosing to stay at home. In fact, many already have because of another trend….on line shopping. We began to feel the effects of this trend in 2013 and don’t see it stopping anytime soon. When the modern American shopping center was born right here at Northgate Mall and proliferated to suburbs around the nation, many downtown cores were decimated. In a recent chat with a downtown department store owner, there is serious concern that in-store foot traffic will decrease by 50% between 2010 and 2020. That is what their models are showing with the extrapolation for us being if you’re not coming downtown to shop you’re probably not going downtown for dinner either.

It is clear to me that this is a direct tax on restaurants like we were some sort of vice like tobacco or marijuana. It is also a thinly veiled tax grab for the city. First the lusty new parking rates and now 20 to 25 percent more sales taxes on increased menu pricing. Shel Silverstein wrote an elegant morality tale called “The Giving Tree” and I’m afraid our leaders have not read it recently. Seattle’s City Council and Mayor attribute their election to the support of organized labor while we as a community are being eaten alive, limb by limb.

Finally, a few thoughts about our “little” company that Jackie and I started in 1989. We are now a collection of small businesses joined at the hip. There is a common core set of values and ideals. We have survived a tortured yet blessed beginning including the release of half of our staff after our first 3 months in business and the birth of baby Loretta 5 months after opening night. Serious under-capitalization, three or four recessions and bubbles, September 11, and even robbery at gunpoint have not deterred us. We have been embraced by Seattle and environs in a way we could never have imagined and for that we are extremely grateful. We have chosen to be part of the livable downtown Seattle solution rather than migrating to safer ports. This minimum wage issue could, depending on the outcome, be the most serious threat to our ability to compete so far.

We have gone from doing a little less than a million dollars in business our first year to over 50 in year 25. Our co-workers have blossomed from 20 to almost a thousand. We have gone from being a few days from bankruptcy to having, at one point, 5 payrolls in the bank . We have averaged a 5% profit over our tenure, 1% better than the national average for fine dining restaurants…yahoo! We treasure our co-workers and customers more than anything else.

As the chips fall in this process let’s ALL be thoughtful and learn ALL the facts about this worthwhile debate. We concur with the idea that everyone deserves a fair wage for a hard day’s work. In my opinion, $15NOW with no acknowledgement of total compensation is a hollow slogan meant for headlines and shout downs rather than thoughtful, meaningful conversation, and equitable solutions. It makes no sense for Seattle to have a carved out exemption when the IRS and the State of Washington both concur that tips are earned income. That is what needs to be said.